Personal Line of Credit vs Personal Loan: What To Know

If you’re planning on borrowing money for a specific purpose, how and when you intend to use your funds should factor into whether you choose a personal loan or a line of credit for your needs.

If you need a lump sum of money right away to make a major purchase or to consolidate credit card debt, a personal loan might be best. But if what you’re looking for is access to credit over a period of time — to cover gaps in monthly income, for example — a line of credit could be a better choice. While both can provide you with the funds you need, it’s their differences that can help you decide which is the ideal choice for your purposes.

What's the difference between a personal loan and a line of credit?

First, let’s look into how a personal loan works. A personal loan is a specific amount of money lent to you in one lump sum. Once your application is approved, funds are typically given to you by check or direct deposit at the time of loan closing. Personal loans can be secured or unsecured and the terms can vary in length (24 months, 60 months, etc.).

As for repayment, most personal loans are considered installment loans since you typically pay the loan back in substantially equal amounts each month. Personal loans usually have a fixed interest rate, which means the monthly payment will stay the same if you keep your account up to date.

In contrast, a line of credit is similar to a credit card. Instead of receiving all of your money at one time, you get access to a set credit limit that you can borrow from when needed. The funds can be accessed through a special card or checks. Some lenders may also allow you to transfer funds directly to your checking account. After you qualify, the lender will likely designate a period of time during which you can "draw" money from the account. This "draw period" can last several years.

Minimum monthly payments will be due during the draw period, and you’ll pay interest on the amount that is borrowed. Since this type of credit is revolving, not close-ended, the minimum payment can fluctuate depending on how much you've spent. If the interest rate is a variable annual percentage rate (APR), then it can change, just like the APR for a credit card can change. If you access more of your credit limit, the minimum payment could get higher. Once the draw period ends, you’ll enter a “repayment period” where you have a set amount of time to pay off any remaining balance.

Is it better to get a personal loan or a line of credit?

It all comes down to your financial needs. What do you need to borrow money for? How much do you need? When do you need it? And how would you prefer to pay it back? Each borrower’s financial situation is different, but here are three things everyone should consider when choosing between a personal loan or a line of credit:

1. Primary need for funding

• Personal loans — Consolidating debt, handling medical bills, paying for auto repairs and making home improvements are a few of the reasons many borrowers choose a personal loan. These are one-time purchases and situations when you know how much money you’ll need.

• Lines of credit — Self-employed workers looking for access to money over a period of time to cover cashflow needs. Homeowners wanting to make renovations but aren’t quite sure how much it’ll all cost. Entrepreneurs trying to get a business off the ground. These are situations where it could be helpful to have an open line of credit to use as needed.

2. Availability of funds

• Personal loans — This is the better choice if you need a lump sum of money right away. Most personal loans are paid out in a one-time disbursement and delivered via paper check, direct deposit to your bank account or to your debit card — sometimes as soon as the same day you sign all the paperwork and close on the loan.
• Lines of credit — If you are unsure of how much or how little money you’ll need, a line of credit allows you to access funds as needed. Instead of a lump-sum check, you’ll receive a credit limit and can access any amount that remains in your balance.

3. Repayment

• Personal loans — The predictability of a steady, fixed payment amount and payoff schedule makes a personal loan an attractive option for those looking for an easy way to manage a monthly budget. As long as you pay on time, you’ll always know exactly how much your payments will be each month, and how long it will take to pay it off.

• Lines of credit — When repaying a line of credit, you’re better off if you can pay your outstanding balance in full and on time each month. Your minimum monthly payment is calculated by adding your previous unpaid balance + interest on that balance + any new charges. Also, the interest rate can change based on your credit score and other factors.

The choice is yours

In the world of borrowing money, there is no “one solution fits all.” The right choice depends on your financial needs, your credit score and many other factors. As you narrow down your options, consider how each one will affect your finances, and choose what’s best for you. Need to consolidate debt, handle unexpected expenses or make a major purchase? OneMain offers fixed-rate, fixed-payment personal loans that can fit your budget and needs. See if you prequalify today.

This article has been updated from its original posting on July 24, 2019. Matt Diehl contributed to this post.